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Technology Stock Roundup: EU Fines Google Shopping

The top news stories from last week are about Google’s GOOGL shopping service, and Toshiba’s ongoing struggle with Western Digital WDC as it struggles to sell its interest in the chip making JV between them.

Google Fined by EU

Google has been slapped with a $2.7 billion fine for favoring Google Shopping/Google Product Search/Froogle over the comparison shopping services of competitors. It will also be fined up to an additional 5% of the average daily worldwide turnover if it doesn’t stop the practice within 90 days. The EC hasn’t specified what actions Google needs to take in this regard, so presumably that will be the subject matter of discussion between them.

The problem has arisen because of Google’s dominance as a search engine, which has effectively made it the gate keeper of the Internet. European Commission chief Margrethe Vestager said that this position was abused to hurt innovation and stifle competition, which therefore limited true choice for European consumers-

"Google's strategy for its comparison shopping service wasn't just about attracting customers by making its product better…Google abused its market dominance as a search engine by promoting its own comparison shopping service in its search results, and demoting those of competitors."

"It denied other companies the chance to compete on the merits and to innovate. And most importantly, it denied European consumers a genuine choice of services and the full benefits of innovation."

"What Google has done is illegal under EU antitrust rules.”

Alphabet General Counsel Kent Walker said a few things in disagreement-

"We respectfully disagree with the conclusions announced today. We will review the Commission's decision in detail as we consider an appeal, and we look forward to continuing to make our case."

"Showing ads that include pictures, ratings, and prices benefits us, our advertisers, and most of all, our users…And we show them only when your feedback tells us they are relevant. Thousands of European merchants use these ads to compete with larger companies like Amazon AMZN and eBay EBAY."

So while the EC’s ruling is based on competition between comparison shopping sites only and it alludes to the fact that Google’s service isn’t necessarily better than its European counterparts, Google’s defense is more about competition between European businesses that use its services. Google brings in Amazon and eBay to further strengthen its case, since these big companies that take care of the major chunk of product search queries and so offer the most expansive comparison shopping services. Moreover, they have flourished alongside Google services and partly with its support.

Investors were upset about the outcome, sending the shares down.

At least one analyst remains positive about Google. Analyst Shyam Patil at Susquehanna Financial said that $27 billion wasn’t a huge amount for a company that had more than $86 billion on the balance sheet on Dec 31. Potential noncompliance fines, estimated at up to $4.5 billion to $5.5 billion are also not substantial considering what Google makes every quarter.

Moreover, European product listing ads (PLAs) were 3% to 7% of its total revenue; applying that rate to estimated second-quarter revenue of $25.60 billion yields potential quarterly negative impact of $768.0 million to $1.79 billion; assuming that Google is forced to include competitor listings in its PLA results and resultant click share losses amount to 25%, there would be revenue loss of $256.0 million to $512.0 million, which isn’t such a big deal.

Moody’s investor service says: “The $2.7 billion fine has a minimal impact on the company's balance sheet, as Alphabet has over $92 billion of cash and marketable securities as of 3/31/2017. Thus, we do not believe the that this fine has an impact on the company's Aa2 long-term credit rating or it's Prime-1 short-term debt rating.

"However, the operational impact this fine has on the company could become more negative than the monetary loss. It is unclear at this moment what changes the EU will force Google to make moving forward to comply with EU antitrust law, but we believe regulatory risk, particularly in Europe, will remain high for the world's leading digital advertising company.”

It doesn’t end there. Antitrust experts and tech executives have reportedly said that the ruling could be an unwelcome precedent in dealings with other big companies as well and some have also called the fine a tax on American innovation.

Developments on Toshiba Chip Unit Sale

Toshiba continues to prefer the Japan government-led consortium’s bid because of concerns about technology transfers, job security for its domestic workforce and prospects of clearing regulatory reviews. At the same time, Western Digital’s revised offer remains unattractive to it.

While Toshiba has said that it is open to discussions with Western Digital, the latter’s objection to the takeover by the consortium is because it includes rival s k Hynix to which there might be technology leaks. People who declined to be named have said that some members of Toshiba’s board share this concern. CEO Satoshi Tsunakawa has said publicly that Hynix would not be holding any equity and would not be involved in management.

In a statement, Western Digital maintained, "The language of the relevant agreements is clear: Toshiba Corporation has no right to transfer its JV interests to a third party without SanDisk's consent. SanDisk has not given its consent to any transaction, and will continue to protect its JV interests and preserve its rights through both its request for injunctive relief and the arbitration process.” A U.S. court will rule on its request for an injunction on Jul 14.

Ticker

Price Change Last Week

Price Change Last 6 Months

AAPL

-1.54%

+24.35%

FB

-2.64%%

+31.23%

GOOGL

-5.71%

+17.32%

MSFT

-3.20%

+10.92%

INTC

-1.32%

-6.98%

CSCO

-2.46%

+3.56%

AMZN

-3.56%

+29.08%

Other Stories

Corporate

Microsoft Reorganization: Microsoft MSFT has a major reorganization coming up that will reportedly serve its customers better as it continues to transform itself from an on-premises software provider to a cloud-focused one. Microsoft chief marketing officer Chris Capossela, and executive vice presidents Judson Althoff and Jean-Philippe Courtois have told their teams how the restructuring will work, indicating that those are the areas where the cuts will likely come. The changes will likely unfold through the year and we will probably know financial details on the next earnings call.

Google Gets New Diversity Chief: Danielle Brown, Intel’s INTC former VP of Human Resources and Group Chief Human Resources Officer, is now starting out at Google as its VP of Diversity. Google’s own diversity report has put it to shame for being something of a laggard in terms of diversity. According to the report as quoted in the media,

Google hires over 56% of whites and 35% Asians, with women at around 31%. Hispanics and blacks are clearly under represented at 4% and 2%, respectively. So Google could clearly benefit from Brown’s diversity skills, as showcased by Intel in its last diversity report under her leadership. Accordingly, Intel reported that it hit its goal of retaining diverse employees (a 15% exit rate for women and people of color compared to a 15.5% exit rate for employees in majority groups).

Amazon a Top 5 Brand: Amazon’s brand value jumped 41% to $139 billion, for the first time breaking into the top five. Amazon came in at the fourth position of the BrandZ listing of 100 most valuable stocks. The list is compiled by Kantar Millward Brown, part of the WPP advertising group. Customer satisfaction has been the primary driver of Amazon’s success, where it scored 23% above the average brand for trust. Google, Apple and Microsoft took the first, second and third positions with Facebook coming in at number five.

Pandora Leadership Undergoes Changes: Pandora’s P co-founder and CEO Tim Westergren has resigned from his position after a little over a year at the job. He also resigned from the board. Pandora has struggled to add to its user base, which remains well below competing music service Spotify. The company had generated a chunk of its revenue from iPhone users, so Apple Music was more of a blow for it than other companies. Westergren clearly couldn’t steady the boat or give it proper direction. Currently, upon Pandora failing to sell itself within the scheduled date, Sirius XM has acquired a 19% stake in the company and three board seats (including the chair) for $480 million.

Wal-Mart CEO Doug McMilon was looking for a private meeting. Defense remains a big topic between the two countries with the Trump administration having authorized the sale of 22 General Atomics MQ-9 Reaper drones, valued at $22 billion, to India and Lockheed Martin agreeing to produce its F-16s in India if it wins a big fighter deal.

Legal/Regulatory

Google Privacy Ruling in Canada: Free speech advocates have gotten quite excited about a Canadian court ruling requiring Google to remove product listings by a company (Datalink Technologies Gateways Inc) adjudged to be doing this fraudulently. Since the Canadian court has jurisdiction over the Canadian company but not over the rest of the world, it is feared that the ruling will open the gates to increased Internet censorship by countries/organizations even when such intervention is not justified.

“This is not an order to remove speech that, on its face, engages freedom of expression values, it is an order to de-index websites that are in violation of several court orders,” Justice Rosalie Abella wrote. “We have not, to date, accepted that freedom of expression requires the facilitation of the unlawful sale of goods.” The case was decided 7-2 in the Supreme Court, upholding the decision of a lower court.

New Products/Technology

Facebook’s Messenger Suggests: Facebook Messenger’s suggestions, first launched in April, added some enhancements last week. So in addition to sharing your location in response to words like "where are you?" or sending money on your behalf when you're talking about making a payment, it will now drop down to the bottom of your chat window to study your interactions and help you act on conversations within Messenger. It can, for instance, help you save content like news stories and Facebook posts for reading later, start a voice or video call, or wish somebody a happy birthday, or simply to start a conversation with contact gone cold. But over time, as it gets to learn more about you, it will change its suggestions to suit your behavior.

Facebook Drone in the Skies Again: Facebook’s Aquila drone project tasted a bit of success as it took off, rose to a height of about 3K feet and landed back safely. Facebook put out a little video of the smooth landing, a nice improvement over the crash last year that was reported by the National Transport Safety Board (NTSB). Outfitting the drone with more sensors to gather additional aerial data, tweaking the autopilot software, and installing a horizontal propeller-stopping mechanism likely contributed to the successful landing this time.

The goal is to get these drones to a height of 60K to 90K feet, from where they will connect with each other to transmit the Internet to areas with limited connectivity. The project still appears to be several years away from its target and lagging the China Academy of Aerospace Aerodynamics, which successfully flew a similar drone to a height of 65K feet, according to media reports.

Google Builds VR Ad Prototype: If the VR concept is to catch on, there has to be suitable hardware and an app ecosystem to drive it. So while some headsets from Facebook, Samsung, HTC, etc have started making their way to market, Google engineers, at its Area 120 internal workshop have been working on the app side, specifically, to help developers make money.

Google says that app developers don’t want anything complicated or too intrusive, so what they’ve come up with is a floating cube that opens into a video player when tapped or gazed at. The video can then be watched and closed by the user as desired.

M&A and Collaborations

Apple’s AR-Focused Acquisition: Apple officially announced its ambitions for the augmented reality (AR) market when CEO Tim Cook announced the VR Kit for app developers and said that the company was baking AR into iOS 11. So when it rolls out the update, millions of devices running the OS will acquire AR capabilities. That’s what will put Apple front and center in the AR game and hopefully also boost its languishing iPhone sales. So it isn’t surprising to see it acquiring small companies to support its capabilities, as it did last week with German company SensoMotoric Instruments for an undisclosed sum.

The company has done eye-tracking research with proprietary hardware since 1991. It has now developed what it calls foveated rendering, which tracks the location of the user’s gaze and renders that area at full resolution while blurring out the rest, thus reducing processing demands significantly.

Tech Companies Unite Against Terror: Facebook, Microsoft, Twitter and YouTube have come together in what could be a noble initiative to identify and prevent the spread of terrorist and extremist content. “Terror” and “terror-inducing” are not the same thing however, the former being the act itself and the latter the excuse given by terrorists for the act.

Provocation for murder generally doesn’t justify or reduce the punishment for murder, unless you’re a terrorist. So when these companies create digitally identifiable “fingerprints” or “hashes” that they share with each other, to identify “extremist” content, it doesn’t automatically mean they are fighting terror.

Add to that the complexities of what the governments of different countries want, what different interest groups want, what lay users themselves want and the evolving nature of language that leads to the same words meaning different things in different times and places, and monitoring terror-driven agendas becomes extremely difficult. The taste of the pudding will be in the eating as they say, so we’ll have to wait and see what actually happens.

Facebook-Fox Sports: Fox Sports will be live-streaming Champions League tournament matches come September. The Fox Sports Facebook page and Fox Deportes Facebook page will stream two matches per day during the group stage followed up with four rounds of 16 matches and four quarterfinal matches in English and Spanish.

What’s more, some of the matches will be streamed exclusively on Facebook although others will also be aired on national TV. Facebook’s soccer community is apparently active (34 million people had 98 million interactions on Facebook related to the Champions League final in which Cristiano Ronaldo’s Real Madrid beat Juventus of Italy, according to Bloomberg). So the company is getting more relevant content to boost is advertising business.

Apple-Cisco on Cyber Security: Apple and Cisco have been in alliance in the past to sell/promote each other’s products. This time they are getting together because they think that together they have what it takes to significantly reduce security risks for their joint customers. So they have inked a deal to sit down with insurance industry leaders to take a look at their solutions and see how they stack up against competing offerings from companies like Alphabet for example. If all goes according to plan, customers using Apple products on Cisco networks could see a reduction in their insurance premiums, which will be an obvious incentive to buy.

Hyundai-Cisco in Connected Cars: The South Korean company is partnering with the networking pro to develop a communication system that will help to increase the efficiency of its advanced driver assistance systems (ADAS). Communication is a very important part of the connected/self-driving car systems because there are many censors and cameras picking up real-world data and processing it against data stored in the cloud to generate information to the car to help it make its next move.

Not only does this information need to travel fast, but it also needs to be highly accurate in order to prevent accidents. The areas Hyundai plans to work on at the moment are cloud, big data analytics and connected car security and it’s expanding its relationship with Cisco for this leg of the journey.

Microsoft-Box Expand Deal: Box has a new/expanded deal with Microsoft that will have the companies selling its cloud content management platform along with Azure to enterprise customers. The deal extends Box’s reach amongst Microsoft’s growing customer base while bringing its machine learning and artificial intelligence capabilities to its platform. It’s also a win for Microsoft, which can now offer more with Azure and thereby compete more effectively against Amazon and Google. But it’s an interesting relationship because the two are also competitors and Box also has a relationship with Amazon.

Microsoft Buys Cloudyn: Microsoft has acquired Cloudyn, a provider of cloud monitoring and analytics solutions across Azure, AWS, Google Cloud, Openstack, and various cloud container installations. It covers consumption, cost and performance of deployments that can help inform enterprise customers so they can plan their expenses and forecast future expenses. The deal is therefore expected to improve demand for Microsoft cloud infrastructure products and help it pull customers from competing services.

Google-Nutanix in the Cloud: The Nutanix hyperconverged infrastructure got a vote of confidence when it signed up with Google’s cloud service, one of the leading cloud infrastructure providers in the world today. Hyperconverged denotes the coming together of compute, networking and storage elements in single solutions that are therefore easier to deploy.

The alliance between the two companies will focus on getting enterprise customers still reliant on internal infrastructure or private clouds into a public or hybrid cloud environment to drive efficiencies. Amazon is still a public cloud provider while Microsoft’s main focus has been on hybrids. This agreement sort of signals that Google is broadening its horizon to hybrid, which makes total sense because enterprises are still not totally comfortable with public clouds, especially on security concerns.

Apple, Google Deals with Rental Car Companies: Car rental companies Hertz and Avis rejoiced as Apple and Google announced self-driving deals with them. In Apple’s case, it is leasing six Lexus SUVs from Hertz to test its self-driving technology. In case of Google’s Waymo, it is paying Avis to store and service the 100s of Chrysler minivans it uses in testing.

The car rental companies are good complements to the commercialization of self-driving technology because they have the geographic breadth, fleet management expertise and business model that is a natural fit. A car rental company can distribute self-driving technology to its users, or maintain and store cars/trucks on behalf of technology companies for use in other ways.

Alibaba Ups Stake in Lazada, ZTE Software Biz: For a billion dollars, Alibaba increased its stake in Lazada (a Singapore-based ecommerce company founded by German company Rocket Internet) from 51% to 83%, making it the largest shareholder. Lazada has operations across Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. It has 23 million active buyers plus a subscription based membership program called LiveUp that offers rewards and promotions from brands including Netflix, Uber, UberEATS, RedMart and Taobao Collection.

Alibaba is also in the process of negotiations with ZTE for the purchase of its telecom gear-making subsidiary ZTEsoft Technology Co. Bloomberg says that Alibaba may spend 2-3 billion yuan or around $300 million on the transaction for ZTEsoft’s global client portfolio and relationships with European and African wireless carriers.

NVIDIA Gets Deeper into Self-Driving Cars: NVIDIA announced a number of deals at the International Congress on Advances in Automotive Electronics. Volvo Cars, Autolive, their 50-50 JV Zenuity and NVIDIA signed a deal to develop next-generation self-driving cars built on NVIDIA’s artificial intelligence-powered car computing platform DRIVE PX to ship by 2021.

Meanwhile, ZF and Hella, two leading automotive component suppliers, have agreed to use DRIVE PX along with their advanced imaging and radar sensor technologies to non-exclusively develop software for the New Car Assessment Program (NCAP) safety certification. The certification will facilitate mass deployment of self-driving technology in vehicles. German car maker Volkswagen also said that it was collaborating with NVIDIA to develop deep learning software that could be used either for traffic management or to work with robots.

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